Introduction Binary Relations Strict Preference Weak Preference and Indifference

ECON915 Microeconomic Theory

Decision Theory I: Preferences

Christian W. Bach

University of Liverpool & EPICENTER

Decision Theory I: Preferences http://www.epicenter.name/bach

Introduction Binary Relations Strict Preference Weak Preference and Indifference

Agenda

Introduction

Binary Relations

Strict Preference

Weak Preference and Indifference

Decision Theory I: Preferences http://www.epicenter.name/bach

Introduction Binary Relations Strict Preference Weak Preference and Indifference

Course Information: Structure

Preliminaries: Introductory Mathematics Block

(weeks 1-2 / numerous lecturers)

Part I: Decision Theory

(weeks 3-6 / lecturer: CWB)

Mid-Term Test (week 7 / during lecture time)

Part II: General Equilibrium, Welfare, and Social Choice

(weeks 8-12 / lecturer: RRR)

Exam (4 compulsory questions / 2 questions on Part I: Decision

Theory & 2 questions on Part II: General Equilibrium, Welfare,
and Social Choice)

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Course Information: Organization of Part II

Introductory Mathematics Block
First two weeks – completed by now

Four (from week 3) lectures: Wednesdays, 15h00-17h00

Location: REN-SR2

Two (20.10. & 3.11.2016) tutorials: Thursdays, 16h00-18h00

Location: ULMS-SR3

In case of questions on Part I (Decision Theory):

Weekly office hours: Wednesday, 17h00-18h30
(new office TBA)
Email: cwbach@liv.ac.uk

Slides for Part I (Decision Theory) will be uploaded on

http://www.epicenter.name/bach
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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Course Information: Assessment

Mid-Term Test in Week 7: Wednesday, 9.11.2016 (20%)

Exam (80%)

The questions at both assessments will mostly be similar to the

exercises discussed in the tutorials, but can also contain some
theory parts from the lectures.

The Mid-Term Test will contain 2 compulsory questions, and the

Exam will contain 4 compulsory questions (2 on Decision Theory
& 2 on General Equilibrium, Welfare, and Social Choice)

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Course Information: Content

Intermediate-level course in decision theory.

Schedule

Week 3: Preferences

Week 4: Utility

Week 5: Choice

Week 6: Uncertainty

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Course Information: Textbook

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Decision Theory: Single-person Choice Theory

based on Axioms
Procedure
1 A set of objects, the choice set X, is identified.
2 Qualitative statements, axioms, about the agents’s preferences
among elements of X, are proposed.
3 A function from X to R, a utility function, is sought such that
higher utility corresponds to more preferred items
(“representation theorem”).
4 Are the axioms sufficient (if the axioms hold, then the
representation obtains), and are the axioms necessary (if the
representation holds, then the axioms obtain)?
5 Results for uniqueness are sought, which characterize the extent
to which two similarly structured representations of given
preferences can vary (“The representation is unique up to . . .”).

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

What Constitutes a “Good” Set of Axioms

In general, axioms should be basic, primitive, intuitive, and

qualitative (“The meaning is rather subjective and controversial”).

Two (rather uncontroversial) technical properties:

1 Consistency: a set of axioms which can be satisfied

simultaneously, i.e. there exists some identifiable collection
of objects satisfying the axioms.
2 Independency: a set of axioms such that no subset of them
implies the others (“Parsimony”).

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Normative Considerations

Suppose an agent thinks a given set of axioms is a reasonable

guide to choice.

Then, corresponding representation theorems guarantee that

the agent wants his choice behaviour to conform to the
respective quantitative representation.

The choice can be inferred from the simpler formulation of the

quantitative representation.

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Descriptive Considerations
Insofar as his preferences (e.g. as revealed by his choices)
conform to a set of axioms, behaviour can be modelled as if the
agent chooses in line with the quantitative representation.
Then, the obvious question is empirical: to what extent do
persons’ choices conform to given axioms resp. representation?
The emphasis is on testable axioms, and on testable
implications of given axioms resp. representation.
Almost no one seriously maintains that persons do conform
exactly to the axiomatic systems of decision theory: in fact, there
exists a substantial amount of empirical evidence against it.
At best, real-world behaviour approximates the axiomatic based
behaviour of decision theory.
Relevance? If persons’ behaviour is approximately what is
modelled, then the model might unveil something about how
behaviours interact or intertwine in the system.

Decision Theory I: Preferences http://www.epicenter.name/bach

Introduction Binary Relations Strict Preference Weak Preference and Indifference

Agenda

Introduction

Binary Relations

Strict Preference

Weak Preference and Indifference

Decision Theory I: Preferences http://www.epicenter.name/bach

Introduction Binary Relations Strict Preference Weak Preference and Indifference

Binary Relations

Let A, B, and X be sets.

The product set A × B of A and B consists of all ordered pairs

(a, b), where a is from A and b is from B.

A × B := {(a, b) : a ∈ A, b ∈ B}

A binary relation B on X is a subset of the product set X × X.

B ⊆ X × X = {(x, y) : x, y ∈ X}

Note that (x, y) ∈ B is also sometimes denoted by xBy, and

(x, y) 6∈ B by ¬(xBy) or x 6 By.

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Examples

1 X = {1, 2, 3}, and B = {(1, 1), (1, 2), (1, 3), (2, 3), (3, 1)}.

2 X is the set of all people in the world, and B is the relation

“shares at least one given name with”.

3 X = R, and B = ≥ , i.e. (x, y) ∈ B, if and only if, x ≥ y for all

x, y ∈ X.

4 X = R, and B is a relation such that xBy iff | x − y |> 1.

5 X = R, and B is a relation such that xBy iff x − y is an integer

multiple of 2.

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Some Possible Properties of Binary Relations

Let B be a binary relation on some set X.

Reflexivity: xBx for all x ∈ X.

Irreflexivity: ¬(xBx) for all x ∈ X.

Symmetry: xBy implies yBx for all x, y ∈ X.

Asymmetry: xBy implies ¬(yBx) for all x, y ∈ X.

Antisymmetry: xBy and yBx imply x = y for all x, y ∈ X.

Transitivity: xBy and yBz imply xBz for all x, y, z ∈ X.

Negative Transitivity: ¬(xBy) and ¬(yBz) imply ¬(xBz) for all x, y, z ∈ X.

Completeness (or Connectedness): xBy or yBx for all x, y ∈ X.

Weak Connectedness: x = y or xBy or yBx for all x, y ∈ X.

Acyclicity: x1 Bx2 , x2 Bx3 , . . . , xn−1 Bxn imply xn 6= x1 for all x1 , x2 , . . . , xn ∈ X.

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Examples
1 X = {1, 2, 3}, and B = {(1, 1), (1, 2), (1, 3), (2, 3), (3, 1)}.
B is weakly connected.

2 X is the set of all people in the world, and B is the relation

“shares at least one given name with”.
B is reflexive, and symmetric.

3 X = R, and B =≥.
B is reflexive, and antisymmetric, transitive, negatively transitive,
complete, and weakly connected.

4 X = R, and B is a relation such that xBy iff | x − y |> 1.

B is irreflexive, and symmetric.

5 X = R, and B is a relation such that xBy iff x − y is an integer

multiple of 2.
B is reflexive, symmetric, and transitive.
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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Brief Digression: N-ary Relations

Consider finitely many sets A1 , A2 , . . . , An .

The product set A1 × A2 × · · · × An of A1 , A2 , . . . , An consists of all

ordered tuples (a1 , a2 , . . . , xn ), where ai is from Ai for all
i ∈ {1, 2, . . . , n}.

A1 ×A2 ×· · ·×An := (a1 , a2 , . . . , an ) : ai ∈ Ai for all i ∈ {1, 2, . . . , n}

A n-ary relation R on X is a subset of the product set

X n := X × X × · · · × X of “n-times” the set X.

R ⊆ X n = (x1 , x2 , . . . , xn ) : xi ∈ X for all i ∈ {1, 2, . . . , n}



Decision Theory I: Preferences http://www.epicenter.name/bach

Introduction Binary Relations Strict Preference Weak Preference and Indifference

Agenda

Introduction

Binary Relations

Strict Preference

Weak Preference and Indifference

Decision Theory I: Preferences http://www.epicenter.name/bach

Introduction Binary Relations Strict Preference Weak Preference and Indifference

Preferences as Paired Comparisons

Suppose some set of items X.

The agent is asked to express his preferences among these

items by making paired comparisons of the form

“I strictly prefer x to y”

for x, y ∈ X, which is written as

x  y.

Note that strict preference is a binary relation on the set X, i.e.

⊆ X × X.

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Preferences

Definition
A binary relation ⊆ X × X on some set X is called strict preference
relation, if it is asymmetric and negatively transitive.

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Characterization of Negative Transitivity

Lemma 1
Let B ⊆ X × X be a binary relation on some set X. The relation B is
negatively transitive, if and only if, for all x, z ∈ X such that (x, z) ∈ B, it
is the case that (x, y) ∈ B or (y, z) ∈ B, for all y ∈ X.

Proof:
Observe, by contraposition, that the statement

“For all x, z ∈ X such that (x, z) ∈ B, it is the case that (x, y) ∈ B or

(y, z) ∈ B, for all y ∈ X.”

is equivalent to the statement

“Let x, z ∈ X. If there exists y ∈ X such that (x, y) 6∈ B and (y, z) 6∈ B,

then (x, z) 6∈ B.”

which in turn is equivalent to negative transitivity.

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Is Negative Transitivity Reasonable?

Is it reasonable to say that if x is strictly preferred to z, then for all
y, either x is strictly preferred to y or y is strictly preferred to z?

Maybe normatively, but descriptively it is at least problematic.

Suppose an agent facing pairs (c, w) of bottles of champagner

and wine, respectively.

For instance, it seems reasonable to assume that

(10, 10)  (9, 9).

Consider now the pair (15, 6).

The agent might not be willing to say either that (10, 10)  (15, 6)
or (15, 6)  (9, 9); he might plead that the comparisons called for
are too difficult for him to make.
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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Some Properties of Preference Relations

Proposition 1
Let X be some set. If ⊆ X × X is a strict preference relation, then 
is irreflexive, transitive, and acyclic.

Proof:

Asymmetry directly implies irreflexivity.

Suppose that x  y and y  z. By Lemma 1, either x  z or z  y.

However, due to asymmetry, z  y contradicts y  z. Therefore, it
must be the case that x  z.

If x1  x2 , x2  x3 , . . . , xn−1  xn , then, by using transitivity

(n − 1)-times, x1  xn obtains. By irreflexivity, it follows that
xn 6= x1 .

Decision Theory I: Preferences http://www.epicenter.name/bach

Introduction Binary Relations Strict Preference Weak Preference and Indifference

Agenda

Introduction

Binary Relations

Strict Preference

Weak Preference and Indifference

Decision Theory I: Preferences http://www.epicenter.name/bach

Introduction Binary Relations Strict Preference Weak Preference and Indifference

Two Further Preference Relations

Given the strict preference relation , two further preference
relations can be defined.

The binary relation

⊆ X × X
is called weak preference relation and defined as follows:
x  y, if and only if , y 6 x
for all x, y ∈ X.

The binary relation

∼⊆ X × X
is called indifference relation and defined as follows:
x ∼ y, if and only if, x 6 y and y 6 x
for all x, y ∈ X.

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Interpretation

Weak preference  expresses the absence of strict preference

in one direction.

Indifference ∼ expresses the absence of strict preference in

either direction.

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Some Properties of Preference Relations

Proposition 2
Let X be some set. If ⊆ X × X is a strict preference relation, then:

1 For all x, y ∈ X, exactly one of the following relations hold:

(i) x  y
(ii) y  x
(iii) x ∼ y
2  is complete and transitive.
3 ∼ is reflexive, symmetric, and transitive.
4 For all x, y ∈ X it holds that, x  y, if and only if, x  y or x ∼ y.
5 For all x, y ∈ X it holds that, x  y and y  x, if and only if, x ∼ y.

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Proof
1 The statement follows from the asymmetry of  and the
definition of ∼.

2 For all x, y ∈ X, either x  y or x 6 y, hence x  y or y  x, i.e. 

is complete. The transitivity of  follows from the negative
transitivity of .

3 The reflexivity of ∼ follows from the irreflexivity of . The

symmetry of ∼ obtains due to its symmetric definition. Consider
x, y, z ∈ X such that x ∼ y and y ∼ z. Then, x 6 y and y 6 z as
well as z 6 y and y 6 x. By the negative transitivity of , it follows
that x 6 z and z 6 x, i.e. x ∼ z.

4 Observe that x  y, if and only if, y 6 x, if and only if, by part 1,

x  y or x ∼ y.

5 The statement follows from part 4 and the definition of ∼.

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Basic and Derived Concepts

The strict preference relation served as the basis, from which

weak preference and indifference were defined.

It would also be possible to ask the agent to express weak

preferences or indifference about the elements in the choice set,
and to then derive the respective two other concepts.

In fact, often the weak preference relation  is taken as the

primitive.

In the standard treatment, such this approach – fortunately –

leads to the same mathematical results.

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Introduction Binary Relations Strict Preference Weak Preference and Indifference

Weak Preference as the Primitive Notion

Proposition 3
Let X be some some set, and ⊆ X × X be some binary relation on X.
Consider a binary relation ⊆ X × X such that x  y, if and only if,
y 6 x, for all x, y ∈ X. If  is complete and transitive, then  is a strict
preference relation.

Due to Propositions 2.2 & 3, it does not matter whether the basis is a
strict preference relation  that is asymmetric & negatively transitive,
or a weak preference relation  that is complete & transitive.

Definition
A binary relation ⊆ X × X on some set X is called weak preference
relation, if it is a weak order, i.e. complete and transitive.

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